Mark McHugh

Are Leveraged ETFs a Dumping Ground for Government Debt?

In Leveraged ETF, SEC, stocks finance, Treasuries on Monday, March 1, 2010 at 9:40 pm

**note: all data used was captured as of the February 26 close.

I’m not big on suspense, so I’ll answer right up front – YES!  Yes they are. In fact when you boil off the bullshit, there’s not much else to them. The actual (net) holdings of one leveraged ETF pair (FAS/FAZ) is currently 84% Goldman Sachs Financial Square Government Fund ($1.44B). But that’s really only slightly more outrageous than Direxion’s total ETF family (here), which is comprised of $4.77B (79%) government debt vs. $1.29B actual investment.  

If you want to understand how I know this, you will have to indulge me a little.   

For a moment, think about the concept of leveraged ETFs; promising returns of up to 300% of a particular index, or its’ inverse (-300%)!  But beyond the ability to make (or in my case, lose) money astonishingly fast; I am astounded that such devices can even be designed, by NASA, or anyone else native to this planet.  Where would you start?  And who are these guys?   

Just another day at Direxion Funds, I guess. 


Leveraged ETFs have boomed, despite having “In the long run…” performance that’s a joke only a Keynesian douche could appreciate.  Take the Direxion Daily Financial Bull 3X Shares (FAS) & Daily Financial Bear 3X Shares (FAZ), for example.  Since their inception in November 2008, FAS is down 75% and FAZ is down more than 96%, while the Russell 1000 Financial Services index (which these funds track) is up about 20%. The only logical way to play these weapons of financial self-destruction is to short them, but as many of you know, finding shortable shares is like finding Bigfoot. That’s where my quest began. 

To make a long story shorter, I got completely sidetracked and wound up looking at the FAZ daily holdings.  Turns out, in order to return –300% of the Russell 1000 financial index you need only to short index swaps and buy Government Debt from Goldman.  That’s it.  Who knew? 

My curiosity piqued, I decided to compare the FAS daily holdings to those of the FAZ.  The FAS bought the same index swaps the FAZ shorted, plus a garbage basket of financial stocks and again, GOLDMAN SACHS FINANCIAL SQUARE GOVT FUND. When you “net out” the holdings, it looks like this: 

 Note: Because the FAZ was short more index swaps then the FAS held long the excess swaps dollar value was subtracted from the stock holdings.  

The bottom line is that these two funds, when combined, hold more than 5 times as much Government Debt as financial stocks, and that seems to be the key ingredient for running a leveraged ETF. Running a similar analysis on the combined holdings of all 28 Direxion ETFs (found here) reveals the more of the same. 

So much for the notion of egg-headed quants warping time and space…   

Please draw your own conclusions about “what this means,” but to me, I think it means you could probably set-up an Ultra three-card Monte ETF if you’re willing to buy enough Treasuries. The only challenge you’re likely to face is finding the right customers. 

  And that Probably won’t be  tough either…

Just to be clear, I am not singling out Direxion. Direxion was used in this discussion because they provide more transparency regarding their actual holdings than other leveraged ETFs. I very strongly suspect that they are all dumping grounds for government debt but don’t disclose that information. I took a quick glance at the holdings of Proshares ETFs (remember, I do this for free). It seems that the biggest item on their ETF holdings is consistently labeled “Net Other Assets / Cash,” which is just a polite way of saying, Fuck you.   


  1. Great article Mark, loved the visuals.

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